SAVERS planning to cash in their pensions should prepare properly to avoid giving a third of their cash to the taxman.

Tax warning for savers who wish to withdraw large sums from their pension pot

Tens of thousands of over-55s are expected to take advantage of Chancellor George Osborne’s reforms, withdrawing all or part of their pension pots from next month.

A quarter of their fund will be tax-free.

The rest will be subject to ordinary tax which, for most people, is 20 per cent.

But the Treasury has told pension providers to apply an emergency 45 per cent tax code if customers cannot supply a P60, P45 or proof of their code.

Pensions expert Dr Ros Altmann, the Government’s Business Champion for Older Workers, said the news was an “unwelcome surprise” to many people.

The warning would be “particularly problematic” for those taking out large sums, she said.

A study suggests 12 per cent of those due to retire in the coming year will cash in their pensions, so about 38,400 people could be affected, while 44,800 people are expected to withdraw part of their fund.

Dr Altmann said the rules mean someone cashing in a £100,000 pension would get 25 per cent tax-free.

The Government wants to ensure it collects the right amount of tax

Dr Ros Altmann

The remaining £75,000 would be taxed at the emergency rate of 45 per cent.

This amounts to a £33,750 tax deduction – or a 33.75 per cent tax rate on the pension.

The emergency code assumes that the amount cashed in from a pension is part of a regular monthly income.

“This happens because the Government wants to ensure it collects the right amount of tax,” Dr Altmann said.

“If you are a high earner, you would be in the 45 per cent tax band.

“But if you are not in that income bracket, your pension company still has to deduct that amount.”

Savers will then be able to reclaim the overpaid tax but this could mean waiting until the end of the tax year.

Dr Altmann advised savers to send their pension company a P45, a P60 or proof of their tax code so that the correct tax could be applied at the outset.

However, she recommended that the best option for a comfortable retirement was to leave savings in a pension fund.